Euro-zone
According to the IMF latest report, the near-term outlook for the euro area has been revised downward. Activity is now expected to contract by 0.2 per cent in 2013 instead of expanding by 0.2 per cent. In the fourth quarter of 2012, activity in the euro area periphery was even softer than expected, with some signs of stronger spillovers of that weakness to the euro area core. In Japan, output contracted further in the third quarter. Continuing uncertainty about the ultimate resolution of the global financial crisis, despite continued progress in policy reforms, could also dampen the region’s prospects. The euro area continues to pose a large downside risk to the global outlook. While a sharp crisis has become less likely, the risk of prolongedstagnation in the euro area would rise if the momentum for reform is not maintained.
Across the advanced economies, the World Economic Outlook predicts 1.3 per cent growth in 2013, compared to 1.2 per cent in 2012. The slight uptick is largely due to the euro area, which is expected to return to very slow growth of 0.2 per cent after the 0.6 per cent contraction in 2012. US growth is expected to fall from 2.1 per cent in 2012 to 1.8 per cent in 2013. According to the quarterly International Business Report, growth rates in and around Europe look weak over the next 12 months with an expected expansion of 0.2 per cent in the eurozone and 1.1 per cent in the United Kingdom. The European Commission data showed sentiment improved the most among consumers and in construction, but also in services — the biggest sector of the euro zone economy, which generates two-thirds of the single currency area's GDP.
Consumers were expecting their financial situation to improve over the next 12 months, unemployment to fall and more were planning major purchases. Consumer inflation expectations in 2013 also showed expectations of an easing. Economists are of the opinion that since the recession in the euro zone is coming to an end it is less likely that the European Central Bank would consider another interest rate cut in its main refinancing rate, now at 0.75 per cent, to support the economy. Last month, the bank predicted that the eurozone economy would either contract or expand between negative 0.9 per cent and positive 0.4 per cent in 2013. But there had been "substantial improvement in market conditions" over recent months.
The European Central Bank (ECB) president now sees eurozone economy to begin recovering in the second half of this year as there had been significant improvements in European financial markets. But it would take time to see similar gains in the real economy. The bank last week announced that more than 130 billion euros in crisis loans lent to European banks would be paid back next week — earlier than expected. It made over one trillion euros of loans available to banks in 2011 and 2012 to prevent another credit crunch. But the performance of the real economy had been less positive. The governments of eurozone members’ states deserved credit for the extraordinary progress they had made in terms of fiscal consolidation and structural reforms.
According to the latest Reuters poll of forecasters, the eurozone's ravaged economy will contract again this year, challenging the European Central Bank's claims of a turnaround in the bloc's fortunes. Economists expect a full-year contraction of 0.1 per cent in 2013 and 1.0 per cent growth across 2014 — a sharp revision down from the 1.2 per cent expansion predicted last month. Germany, the eurozone's largest economy, will escape recession by returning to minimal growth this quarter after contracting in the last three months of 2012. France, the bloc's second biggest economy, has sunk into a short-lived recession from which it will begin to emerge in the spring. Spain, Greece and Portugal face a tougher 2013 than previously thought.
Emerging markets
Emerging economies will lead growth in 2013 as the global economic outlook remains challenged by the eurozone's debt crisis and high unemployment in the United States. According to the Institute of International Finance, Europe's emerging east especially is expected to benefit if the euro zone debt crisis continues to ease, after inflows to the region slowed last year. The leading rich economies have kept interest rates at historic lows and are taking action to ease policy even further. The IIF predicts that private capital flows to emerging economies will rise to $1.118trillion in 2013, a 3.5 per cent increase from an estimated $1.1080trillion in 2012. Private investors are set to pour more money into emerging market countries this year as their economies grow strongly and interest rates in developed markets remain low.
Monetary conditions in mature economies remain exceptionally easy. Combined with the favourable growth conditions in emerging economies, this has produced a notable upswing in flows during 2012, and this will continue in 2013. Flows are likely to rise further in 2014, to $1.150 trillion. There had been a strong revival in flows since mid-2012, even though flows overall dipped slightly last year from the 2011 level of $1.08 trillion. Inflows to the region fell to $193 billion last year from $210billion in 2011, but the IIF forecasts a rise to $220billion this year and a further rise to $237billion in 2014.Despite the economic challenges faced by nations world over, the emerging market economies have registered significant gains based on liberal economic reforms pursued over the last two decades. The large emerging market economies would now have to address the fundamental structural issues which face their economies and usher in the next phase of economic reform. Growth in emerging market and developing economies is on track to build to 5.5 per cent in 2013. Nevertheless, growth is not projected to rebound to the high rates recorded in 2010–11. Supportive policies have underpinned much of the recent acceleration in activity in many economies. But weakness in advanced economies will weigh on external demand, as well as on the terms of trade of commodity exporters, given the assumption of lower commodity prices in 2013.
Among emerging-market regions, Asia Ex-Japan will continue to be the stand-out performer in terms of growth, with domestic demand and investment broadly robust, particularly in the Asean region, while an additional tailwind is likely from accelerating growth in China in the first quarter of 2013. Chinese growth is forecast to accelerate to eight per cent this year, from an estimated 7.6 per cent in 2012, aided by a sustained US recovery, rebound. In 2012, emerging markets in general have had three characteristics in their favour: generally high economic growth rates, large amounts of foreign reserves and low foreign debt. Many emerging economies appear to be on the cusp of consumer booms as well as productivity advances, which should bode well for future growth potential.
From 2019-2025 emerging and developing countries are projected to grow at 3.3 per cent. Various analysts predict that the first half of next year will be favourable for emerging markets, where growth will recover moderately, as the fears of a break-up of the eurozone recede and if the US lawmakers find a solution to avoid falling off the ‘fiscal cliff’. Meanwhile, a leading lobby group for the world’s financial institutions is warning investors not to get caught short in emerging markets if rich-country central banks end their easy and cheap money policy of the past few years. According to the Institute of International Finance, the withdrawal of massive stimulus by the US Federal Reserve and other central banks could lead to a ‘boom-bust cycle’ in emerging markets if investors are unprepared.
Latin America and Caribbean
Latest forecast by the UN issued in December 2012 reveals that Latin America and the Caribbean will see strong economic growth in 2013 despite Europe's fiscal woes and a struggling US economy. The region is expected to expand by 3.8 per cent in 2013, mainly due to a recovery of Argentina and Brazil, and higher internal demand in several nations. The estimate for growth is slightly lower than the United Nations Economic Commission for Latin America and the Caribbean (ECLAC)’s previous forecast of four per cent. A recession in Europe and sluggish growth in China and the US eroded the global economy in 2012 with dwindling world trade and output. Latin America was hit by slower growth in two of its regional powerhouses.
Argentina grew 2.2 per cent in 2012 versus 8.9 per cent last year, while Brazil slowed down to 1.2 per cent versus 2.7 per cent in 2011. In 2013, Argentina is expected to grow by 3.9 per cent while Brazil is set to expand by four per cent, mainly due to a recovery of industrial activity, internal consumption and a hike in exports. Chile is expected to expand by 4.8 per cent and Peru by six per cent. The regional economies, however, will remain largely dependent on world economic trends. Europe's slow growth and even recession in some cases will continue in throughout 2013. The Caribbean economies, which grew 1.1 per cent as a whole in 2012, will remain fragile and will need reform with outside help. The challenge for Latin America and the Caribbean is still to increase and stabilise investment growth.
According to the IMF, Latin America is going through some turbulence of its own, as growth in its two largest economies trails off sharply after several boom years, as exports wane and as domestic demand slackens. In Brazil, global uncertainties and earlier fiscal tightening had an impact larger than expected, especially on private investment. Argentina, for its part, recently turned toward economic nationalism and retaliatory protectionism after growth slumped. Growth in Venezuela has been slowed by a number of factors. Chile has experienced an average growth rate of five per cent for the last three years.
The Fund has cut its economic growth projection for Latin America this year to 3.6 per cent, due to a more muted outlook for Brazil. Brazil will expand by 3.5 per cent this year, at the same pace as the Mexican economy, the region's second largest.Growth predictions for Chile and Peru are comparatively strong into 2013. It predicts 4.4 per cent growth for Chile and close to six per cent growth for Peru. The region's combined GDP will expand at a rate similar to that of the world, which it sees expanding by 3.5 per cent. Latin America's forecast is also better than the IMF's projection for a 1.4 per cent expansion in advanced economies.
Earlier in October, it had forecast that Latin America would expand by 3.9 per cent in 2013, anchored by a 3.9 per cent expansion in Brazil, Latin America's largest economy, and 3.5 per cent growth in Mexico. In 2012 Latin American economies expanded by three per cent. Panama was the region's fastest growing regional economy in 2012 with a 10.5 per cent expansion, followed by Peru's 6.2 per cent, Chile's 5.5 per cent and Venezuela's 5.3 per cent. The region closed in 2012 with an estimated 3.1 per cent growth. That is higher than expected growth for world economy of 2.2 per cent but lower than the region's 4.3 per cent growth last year.
Meanwhile, Latin American government financing needs are forecasted to decline to $428 billion in 2013, or 7.3 per cent of regional GDP, from an average of nine per cent in the four years after the global financial crisis, according to a new Fitch Ratings report. Most of the decrease in the region's borrowing requirements stems from the reduction in domestic and external debt redemptions resulting from adept liability management in several countries while fiscal deficits reduction contributes only marginally to the decline. The financing needs of some of the largest economies including Brazil, Colombia and Mexico, are expected to fall but — except for Colombia — will remain higher than the Latin American median of 5.9 per cent of GDP in 2013.